Galan Lithium: An Upcoming Star in the Lithium mining industry
Company profile
Galan Lithium Limited acquires, explores for, evaluates, and develops mineral projects. The company primarily explores for lithium and other deposits. The company has three lithium assets currently under development, with its flagship asset being the Hombre Muerto West (“HMW”) project in Puna, Argentina. The company was formerly known as Dempsey Minerals Limited and changed its name to Galan Lithium Limited in August 2018. Galan Lithium Limited was incorporated in 2011 and is based in West Perth, Australia.
Summary
- Galan's Hombre Muerto West initiative appears to stand out as one of the most promising lithium projects under development
- The company's Greenbushes South project in Australia serves as a genuine grassroots exploration endeavor, offering investors an extra source of anticipation
- Galan's leadership team ranks among the industry's finest, addressing execution concerns and enhancing operational decision-making.
- Company well positioned to ride lithium boom in spite of visible country risk.
This article will look at how Galan has evolved since 2021 and how its commercial prospects look now.
Hombre Muerto West
Let's start with the analysis of the company's main project - Hombre Muerto West.
Since 2021 the 11,666-hectare HMW project has risen form 2.267 a milion tonne resource, at an avg lithium concentration of 946 mg/l to 6,582 milion tonnes (avg concentration is 880mg/l) as of May 2023.
Despite the substantial growth, the economic projections for the project remain based on the preliminary economic analysis ("PEA") conducted in August 2021. In essence, these estimates are far from reflective of the project's current scale.
Instead, Galan's new objective is to achieve an annual production of up to 60,000 tonnes of lithium carbonate from HMW and its nearby Candelas project, marking nearly a twofold increase from the original PEA. Additionally, the four-stage project is now anticipated to integrate potash as a by-product, mirroring the operational approach of SQM in Chile to mitigate operating costs.
The updated Detailed Feasibility Study (DFS) was initially scheduled for release in the first quarter of this year, but as of now, it remains unfinished. In the quarterly update released on April 28, the company adjusted the DFS plan to encompass two phases, scheduled for completion in May and August, respectively.
The decision to prioritize the resource exploration program over the initial DFS, evident in the most recent resource update on May 1, appears logical from a developmental perspective. However, the delay raises questions about why the completion, expected at the end of the previous year, is now postponed until August.
According to the company, the appointments of Juan Carlos Barrera and Ms. Claudia Pohl in March initiated a review of the ongoing DFS process. This review led the team to undertake additional optimization studies, causing a delay in the DFS release. In response, the team opted to split the DFS into two phases, covering the first two planned production phases at HMW.
Consequently, the Stage 1 DFS will delineate the operational parameters for the production of lithium chloride at a rate of 4,000 tonnes per year ("tpa") lithium carbonate equivalent ("LCE"). LCE serves as a standardized unit for normalizing lithium production across different lithium compounds.
As lithium compounds vary in lithium content per unit of mass, using LCE provides clarity on the scale of a proposed operation. For instance, lithium chloride contains 0.871 times as much lithium per unit of mass as lithium carbonate. In Galan's case, the company plans to produce a lithium chloride solution at approximately 6% lithium concentration, amounting to around 12,500 tonnes of lithium chloride per year at a concentration of approximately 37%.
The company anticipates finalizing and releasing the Stage 2 DFS by the end of August, focusing on production up to 20,000 tpa LCE and targeting the production of "high grade, low impurity Li chloride/carbonate." This likely implies that initial production in later stages will involve lithium chloride, with subsequent installation of lithium carbonate capacity.
Time to Production
Galan's shift to a new four-stage production strategy is primarily driven by the aim to adhere to its original target of achieving commercial production by the first half of 2025. To gain deeper insights into this strategic pivot, we can refer to the company's November 2 release, where it announced the application for permits for a 4ktpa LCE lithium chloride plant.
It's noteworthy to consider the timing of this announcement. At that time, the company was still publicly committing to releasing a Detailed Feasibility Study (DFS) in Q1 of this year for a 20ktpa lithium carbonate project. The expanded lithium chloride plant was initially labeled as a "scaled-up pilot plant" to operate at a "semi-commercial scale."
As Galan revised its DFS and clarified its production plans, this "semi-commercial" facility evolved from being merely a pilot plant to an integral part of Galan’s commercial strategy. While part of this move is undoubtedly aimed at reassuring investors about the company's adherence to the H1 2025 production target, it's worth noting that Galan will also be producing an authentic lithium product.
Though it might not be crucial, understanding the genesis of Galan’s revised strategy, or at least where the turning point occurred, provides interesting context.
Now that Galan has transitioned from a 20ktpa lithium carbonate plant to a four-stage project, commencing with a 4ktpa LCE lithium chloride plant, the production timeline takes on a different shape. The figure below, sourced from a press release, provides clarity on the updated schedule:
Aiming to achieve 60ktpa by 2030 appears to be an ambitious goal, and skepticism lingers regarding Galan's ability to execute on this timeline. Nevertheless, the company has made substantial progress in deploying its initial small-scale commercial facility.
In late November, after disclosing the permit application for its upsized "pilot plant," Galan shared data on the flow from one of its production wells. More intriguingly, the data from on-site evaporation tests is noteworthy. The company successfully attained a 6% lithium concentration (~37% LiCl) in evaporation ponds designed to simulate commercial operating parameters. This development not only validates their brine evaporation process but also positions the company to provide representative commercial samples to potential customers and partners.
Galan has either completed construction or initiated construction on nearly half of the production wells required to support a 20ktpa LCE production. This indicates that the production plan is well-mapped, and a detailed reserve model supports the notion that the DFS is largely complete at this juncture.
Finally, the permits applied for in November are expected to be approved this month, according to a company release. Once secured, Galan can focus on completing the 4ktpa facility and bringing it online.
Company Risks
Starting with an examination of Galan's fundraising efforst and its current financial standing, the company's cash balance is approximately 50 million AUD following a stock offering last month. These funds are earmarked primarily for acquiring long lead items for the 4ktpa facility and the Stage 2 DFS. However, despite the favorable financial position at present, it is likely that Galan will need additional capital to complete its Stage 1 production site.
The initial capex estimate for the 20ktpa facility, based on the Preliminary Economic Analysis (PEA), was $338 million. Scaling this down to a fifth and factoring in a ~40% cost reduction due to the absence of a carbonate conversion plant, the estimated cost decreases to $41 million or ~61 million AUD. Considering general inflationary pressures since the PEA, a more realistic final cost is estimated to be closer to 80 million AUD.
While Galan can leverage some of the existing infrastructure on-site, there is still a need to secure additional funding. Although the amount is relatively modest, around 80 million AUD, there shouldn't be significant hurdles in raising the required capital. However, financing the remainder of the project presents a more complex challenge.
The anticipated cost for the initial 20ktpa plant is likely to be at least $500 million. Despite the expected EBIT of over $50 million per year from the 4ktpa plant, Galan will probably need external sources to finance this substantial expansion if it intends to adhere to its projected timeline.
Traditionally, such financing involves selling a substantial portion of the project, often around 50%. With the growing influence of lithium producers due to metal shortages, some customers may provide sizable equity investments in exchange for significant offtake rights. However, Galan's location in Argentina could pose a challenge, as the absence of a free trade agreement with the United States may limit offtake interest from American clients. There are recent reports suggesting Argentina is negotiating an exemption to make its lithium eligible for EV tax credits, potentially enhancing Galan's appeal to U.S. automakers.
Its important to consider the recently announced merger between Allkem and Livent, both with projects in the Hombre Muerto salar. This consolidation may lead to a desire to acquire a stake in or acquire the HMW project or Galan itself. While a partnership with the combined entity could be beneficial, a complete acquisition is less favorable.
The financing details will only become apparent after the completion of the Stage 2 DFS. Investors should anticipate significant concessions in exchange for project financing. Offtake coupled with a smaller equity investment is a preferred route due to its cost-effectiveness. However, if Galan opts to sell 50% of its project, an arrangement with Allkem/Livent would be the most ideal.
Shifting focus to permitting, while acquiring permits for the proposed 4ktpa LCE facility seems manageable given the existing lithium producers in the salar, obtaining major permits for the 20ktpa facility by August, concurrent with the DFS completion, appears a reasonable projection.
Permitting for the larger 60ktpa facility may pose challenges, with existing projects potentially working against Galan as environmental strain grows. While Galan believes nearby water sources will support its project, concerns about the health of the Hombre Muerto salar and potential conflicts with Allkem/Livent's operations raise caution. Investors should be aware that increasing production might pose challenges, impacting the forecasted production timeline.
Regarding the Greenbushes South project, the high resource risk is acknowledged due to limited exploration. However, given its perceived minimal contribution to Galan's market value, any setbacks in this project may not have a substantial impact.
Execution risk is an ever-present concern. While the H1 2025 target for the 4ktpa plant seems feasible, the 20ktpa plant might face delays, potentially extending to 2027 or beyond. Commencing production at a new project is a challenge even for major lithium producers, and delays are difficult to avoid. At the junior level, where experience is often lacking, ensuring timely production is not guaranteed. Nonetheless, Galan benefits from a robust team, providing some assurance in navigating these challenges.
Company Leadership
Galan not only boasts formidable assets but also stands out for its exemplary leadership, ranking among the finest in the junior company landscape. The management, board, and advisors comprise several former members of SQM leadership, whose influence permeates the company.
On March 15, Galan announced the appointment of Juan Carlos Barrera "to the senior management team as a consultant and advisor to the Board." With 12 years of experience as the Senior Operation Vice-President of Lithium & Potassium at SQM before joining Galan, he had overseen the operation of 11 production plants.
Such extensive industry experience is invaluable in any sector, but in the lithium industry, where talent and experience are in high demand, it is genuinely priceless. Galan explicitly credited Mr. Barrera with influencing their DFS plan in May, shedding light on how potash became a significant element at HMW.
Later in the same month, Galan augmented its leadership team with another ex-SQM luminary, María Claudia Pohl Ibáñez, joining the company's board of directors. With a 23-year tenure at SQM encompassing various senior executive roles, including overseeing lithium planning and studies, Ms. Pohl further strengthens Galan's leadership with her wealth of experience.
Valuation
At present, the company's outdated Preliminary Economic Analyses (PEAs) no longer accurately depict Galan's current objectives. Additionally, with a surge in inflation over recent years, particularly in Argentina, relying on estimates from those figures may not be significantly meaningful.
Initially, the PEAs highlighted remarkably low operational costs, situated near the bottom of the lithium cost curve at $3,518 per tonne. While costs are anticipated to remain relatively low, inflationary pressures likely have pushed them closer to $4,200 per tonne.
Let's work with a baseline operational cost estimate of $4,200 per tonne and a sales price of $22,000 per tonne. Although it's worth considering that recent spodumene offtake agreements suggest a potentially conservative price estimate.
It's essential to recognize that 7-8 tonnes of spodumene concentrate are required to produce a tonne of lithium hydroxide. A recent agreement involving a Saudi firm with a price floor of $3,000 per tonne for spodumene concentrate underscores the potential challenges in estimating prices. Assuming an efficient conversion process, the Saudi refinery faces a minimum cost of $21,000 per tonne for spodumene, with the additional cost of refining it into lithium hydroxide bringing the all-in production cost to at least $25,000.
Considering the quality of Galan's project, it's challenging to envision a scenario where their lithium carbonate production cost exceeds $5,000 per tonne. With prices exceeding $22,000 per tonne, the specific operational cost for Galan becomes somewhat less critical.
Applying the outlined parameters, Galan could generate $356 million per year in EBIT at the 20ktpa production level. At 40ktpa, this figure doubles to $712 million, and at 60ktpa, it reaches $1.095 billion.
Even if the company relinquishes 50% of the project to facilitate production, a Price-to-Earnings (P/E) ratio of 8 would result in a valuation of $1.424 billion at the 20ktpa level. While achieving this in three years is ambitious, even a four-year timeline would yield a substantial 550% return. This assumes everything proceeds as planned, though projects often face delays.
Furthermore, if the company attains the 60ktpa level, albeit not guaranteed, the valuation could rise to $4.38 billion, following the same parameters. This represents an impressive nearly 1,900% return over the company's current price.
It's crucial to bear in mind that this is a long-term projection spanning over a decade, with numerous potential disruptions. This extended horizon introduces significant risk and slightly tempers the allure of the 1,900% return. Despite this, the annual return is still noteworthy at approximately 34.8%, though it lacks the immediate appeal of a 1,900% return.
Key Takeaway for Investors
The Hombre Muerto salar is seen as one of the best places globally for lithium mining, ranking just below the Salar de Atacama. Some argue it's even better due to less strict regulations compared to the Chilean salar.
Galan's junior portfolio, featuring high-quality assets in well-known mining areas, is hard to beat for the price. The company's leadership, including experienced individuals from the biggest lithium producer globally, adds to its appeal and increases the chances of success.
However, it's crucial to understand that investing in lithium juniors comes with significant potential rewards but also considerable risks over a long period. While Galan has taken steps to minimize these risks, investors should be aware of the inherent uncertainties linked to junior investments.
Analyst's Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in CCJ, over the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Harmonic Invest's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Harmonic Invest is not a licensed securities dealer, broker or UK investment adviser or investment bank. Harmonic Invest is managed by an individual writer who is not licensed or certified by any institute or regulatory body.